The personal loan industry is healthy and many people use personal loans to consolidate debt, according to Experian. But getting denied a personal loan can be frustrating for those looking to improve their financial situation.
A loan rejection isn’t personal, but it can be hard not to take it that way. It might remind you of some past credit missteps you’d rather forget, or it might feel like an attack on your credibility if you thought you’d get approved.
“Lenders are trying to figure out how much risk they are taking by lending someone money,” said Can Arkali, principal scientist of analytics and scores development at FICO. “They need to figure out how much money to lend and under what terms.”
But instead of allowing a personal loan denial to take your morale down a notch, use it as an opportunity to learn and improve your credit and financial standing. To help, we’ve put together a list of five steps you can take to improve your chances of getting approved the next time around.
1. Read the adverse action letter
If a lender denies your application based on something in your credit report, the Fair Credit Reporting Act requires it to send you an adverse action letter in the mail or electronically explaining why you were denied.
“One of the first steps that a consumer can take would be to read that document carefully,” said Arkali. “In there, consumers can get to see what we call ‘adverse action codes’ or ‘reason codes.'”
Reasons for denial might include:
- Your credit score doesn’t meet the lender’s minimum standards.
- Your credit history is limited.
- Your debt-to-income ratio is too high.
- You have a recent delinquency or an account in collections.
- You have too many recent inquiries on your credit report.
Regardless of the reason the lender provides, what’s important is that you understand exactly what you need to do to get approved the next time you apply.
For example, if your credit score was too low, it’s possible that you could still get approved for a personal loan elsewhere. In fact, there are personal loans designed for people with bad credit that aren’t predatory in nature. If it’s something else, though, you can start tackling it.
2. Check your credit score and report
While an adverse action notice gives you a specific reason why you were denied, it’s wise to make sure there aren’t any other issues with your credit that could get worse by the time you apply again. You can get free access to your FICO credit score through the FICO Score Open Access program.
For example, your credit card issuer might offer your score for free through this program. Alternatively, you can check your score through the Discover Credit Scorecard, and you can access each of your three credit reports for free once a year at AnnualCreditReport.com.
Here’s an example of what you might see on your credit report:
Specifically, search for items that might be hurting your credit now or can potentially hurt it in the future. For example, your payment history makes up 35% of your FICO score. If you have a late payment on one of your accounts, the longer you take to pay it off, the more it damages your score. Also, how much you owe makes up 30% of your FICO score, so a high credit card balance can do a lot of damage.
Look for errors in your report, too. Sometimes, a creditor or credit bureau makes a mistake that can negatively affect your credit history. Alternatively, it could be a fraudulent account someone opened in your name. If you find something that’s off, dispute it with the credit bureau and start the process of getting it removed.
3. Create a plan
Now that you know what issues you need to target, create a plan to determine what you need to do and how to do it. There’s no clear-cut way to do this because your plan will depend on the issues you need to address and your overall financial situation.
For example, it might be nice to bring your credit card balance down to a reasonable level — preferably less than 30% of your credit limit. But if your budget is tight, that’s easier said than done. Take a look at areas of your budget where you can cut back, then set a goal to put a specific amount toward your credit card debt each month.
You can do the same thing if you need to get caught up on some payments, pay off an account in collections, or target another goal.
4. Be patient
Depending on the issue you’re dealing with, it can take anywhere between a few months to more than a year to get your credit where you want it to be. As a result, avoid setting your expectations too high. If your expectations are unreasonable or you get impatient, you could set yourself up for failure.
“We look at this as a financial journey,” said Arkali. “It’s analogous to trying to get into perfect physical shape. It’s not exactly easy to actually get to that point overnight. It’s gonna take some time.”
That said, it’s important to keep track of your progress. Continue to check your credit score regularly to see how your actions impact your score. Doing this will also help you get ahead of any potential issues that can develop as you’re working to improve your credit.
5. Shop around
Once you get to the point where you feel comfortable applying again, compare personal loans from several lenders to improve your chances of getting approved. Many of the top personal loan companies allow you to see rate offers before you officially apply. They run a soft credit check — which won’t hurt your credit score — to determine whether you qualify. If you do qualify, you’ll learn what your interest rates and terms could be.
As you’re shopping around, look at more than just interest rates. Compare fees, limitations, discounts, and other features each lender offers. The more lenders you compare, the more likely you are to find a lender that will approve you with reasonable terms.
Develop good credit habits for the future
If you follow the steps above, improving your chances of getting approved for a personal loan is only one of the benefits you’ll reap. You’ll also improve your chances of getting approved for other credit at reasonable rates, which can save you money on interest. Establishing good credit habits can also help you get better control over your money now and in the future.
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.16% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at time of application. The origination fee ranges from 1% to 6% and the average origination fee is 5.49% as of Q1 2017. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|7.73% – 29.99%||$1,000 - $50,000||Visit Upstart|
|5.81% – 15.37%1||$5,000 - $100,000||Visit SoFi|
|6.87% – 35.97%*||$1,000 - $50,000||Visit Upgrade|
|8.00% – 25.00%2||$5,000 - $35,000||Visit Payoff|
|4.99% – 29.99%3||$10,000 - $35,000||Visit FreedomPlus|
|5.99% – 18.99%4||$5,000 - $50,000||Visit Citizens|
|15.49% – 34.49%5||$2,000 - $25,000||Visit LendingPoint|
|6.16% – 35.89%6||$1,000 - $40,000||Visit LendingClub|
|6.99% – 18.24%7||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%8||$2,000 - $35,000||Visit Avant|